David Farrar: The Crafar dilemma

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The ruling by the High Court that the criteria used for the last decade or so by the Overseas Investment Office and hence Ministers, in deciding applications for foreign investment, was flawed was a bombshell, both politically and economically.

On the political front the decision is as popular with the Government as a colonoscopy. It might turn out to be good for you in the long term, but it is making life very uncomfortable for now.

For the Opposition, it was like an early visit from the Easter Bunny, just as their chocolate supply was running out. The questioning in the first week of Parliament this year on the issue amounted to little as Ministers ran the line that they were merely applying the law, and that there were no lawful reasons to decline the application by Shanghai Pengxin.

The decision of the High Court means at a minimum that the issue will remain in the headlines (unless further MPs are found out to be supplementing their salaries with some side-line scalping) for a couple more weeks, maybe longer.

The difficulty for the Government lies in what the Ministers (Williamson and Coleman) decide this time around. They have the unfortunate position of being damned either way. If they approve the application again, on the revised interpretation of the criteria, then they be accused of ignoring the court ruling (even if they do not) and enthusiastically hocking the farms off to foreigners. Their defence of "We had no choice, we have to obey the law" will not be highly persuasive.

But equally harsh times await them if they turn the bid down. The Chinese Government will see the decision as bigotry towards Chinese investors, noting the masses of land sold without fuss to citizens of other countries. Our diplomats will try and explain to the Chinese Government that the Ministers had to follow the law, as laid down by the court, and that under the court's interpretation, the bid now failed. The problem is that the Chinese Government won't accept out courts are truly independent and that Ministers can't simply over-rule them. They will take the decision as an insult, and suddenly our largest growing export market might start shrinking to us.

So the political ramifications are pretty ugly for the Government either way. Of more significance is the economic ramifications of the court decision, for future applications.
The Overseas Investment Act specifies a number of criteria any application has to meet, including tests around investment in New Zealand as a result of any purchase. Now the practice of the Overseas Investment Office for the last decade or so has been to compare what will happen if the purchase is approved to the status quo - being the land or asset remains with the current owners.

The High Court has said that this is the wrong comparison to make. They have said the comparison or counter-factual should not be with the status quo, but with if the land or asset is sold to a New Zealand buyer. The Overseas Investment Office argued that such a test is impractical as it would require them to make lots of assumptions about what a New Zealand buyer might do. They have a point, that their analysis would often have to be highly speculative.

In this particular case there is a consortium led by Sir Michael Fay trying to buy the farms for $40m less than Shanghai Pengxin are offering. They have detailed what they plan to do with the farms, so in this case a comparison can be done. However it is worth noting an overseas buyer is legally bound to follow through on their undertakings to OIO. A domestic buyer can do what they want, once they have the land.

Putting aside the practicality aspects, it is hard to argue with the logic of the learned judge, that any benefit should be measured against a domestic buyer, rather than against the status quo. By measuring against the status quo, it is almost inevitable that net benefits will be found as new buyers always will have investment plans greater than the seller.

Opponents of foreign investment have long claimed that the OIO always say yes. This court ruling could well change that, and future applications for foreign investment may find the answer is now no on a regular basis.